Here Are the Top Yielding SFR Markets in the U.S.

With high prices and high down payments interacting with mortgage rates still topping 7% for a 30-year fixed loan, it’s a tough market for those looking for their first house. But “the headwinds disproportionately impacting the affordability of homeownership are proving to be the SFR market’s tailwinds,” says Moody’s Analytics CRE.

“The inevitability of increased interest rates as the Federal Reserve’s main monetary policy tool to manage persistent inflation and return to price stability inevitably has led the weekly 30-year fixed mortgage rate average in the US to a 20+ year high,” the firm said. 

The current conditions have made the existing home market “extremely tight.” Those who might otherwise think of selling their own homes face two potential problems. One, they likely have low mortgage rates, and that cheap debt won’t be available if they move. Second, close to record prices, even with some drops, and high mortgage rates make properties more expensive, and the current owners realize that they might not be able to get the prices they want. That reduces inventory and keeps upward pressure on prices.

Many people would rent a house as an alternative, which helps push SFR values as an investment. But there is a secondary effect. As Moody’s noted, “investors, institutional, regional, and small mom-and-pop operators are sensitive to market conditions, slowing the pace of acquisitions as interest rates rise.” That means supply won’t expand to meet demand, making the conditions an “absolute boon” to SFR.

That is likely to change, they said, “as many institutional operators enter into joint ventures with banks, homebuilders, and private equity firms to expand their horizontal multifamily positions.” That is, build-for-rent, or BFR.

But for now, that isn’t the case and SFR is benefiting strongly from the current housing market constraints. Here are the top 10 metro areas for SFR, along with their year-to-date gross yields and their ratios of houses available for rent versus those for sale, based on data from Parcl and Moody’s.

• Rochester, NY — gross yield, 11.7%; rent-to-list ratio, 0.19
• Harford, CT — gross yield, 8.6%; rent-to-list ratio, 0.15
• Buffalo, NY — gross yield, 8.0%; rent-to-list ratio, 0.13
• Pittsburgh, PA — gross yield, 8.0%; rent-to-list ratio, 0.50
• Cleveland, OH — gross yield, 7.8%; rent-to-list ratio, 0.30
• Cincinnati, OH — gross yield, 7.6%; rent-to-list ratio, 0.26
• New Orleans, LA — gross yield, 7.5%; rent-to-list ratio, 0.46
• Chicago, IL — gross yield, 7.4%; rent-to-list ratio, 0.25
• Detroit, MI — gross yield, 7.0%; rent-to-list ratio, 0.33
• Houston, TX — gross yield, 7.0%; rent-to-list ratio, 0.70

“When the number of properties currently available for rent compared to the number of properties currently available for sale is high, as captured by the rent-to-list ratio, gross yields tend to be lower,” Moody’s wrote. “There is also significant overlap between a high rent-to-list ratio and sizable institutional SFR portfolios in the metros. The converse is true for metros where the rent-to-list ratio is low. Houston notably stands out as a metro in which the gross yield cracks the top 10 yet has a high rent-to-list ratio and thousands of properties owned by institutional operators.”